7. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible on the option for the speculator based on the information above is:

B. -$1,562

16. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ________ for the buyer of the put, and ________ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

e. $1.57; $1.57

17. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

b. -$.02

18. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

e. None of the above.

19. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. The spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit is:

c. $.01

20. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

e. None of the above.

24 A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

84,000

25 A U.S. corporation has purchased currency call options to hedge a 62,500 British pounds payable. The premium is $.02 per unit and the exercise price of the option is $1.50. If the spot rate of the pound at maturity is $1.65, what is the total amount paid by the corporation if it acts rationally?

$95,000

26 Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. If the spot rate turns out to be $.0090 in 60 days, how many dollars will you receive for the 5,000,000 yen at that time?

d. $47,500

36 Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

a. $15,385

Assume the following information. You have $1,000,000 to invest.Current spot rate of pound = $1.3090-day forward rate of pound = $1.283-month deposit rate in U.S. = 2.25%3-month deposit rate in U.K. = 4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

a. $1,024,000.

Assume the following information:Current spot rate of New Zealand dollar = $.41Forecasted spot rate of New Zealand dollar 1 year from now = $.43One year forward rate of the New Zealand dollar = $.42Annual interest rate on New Zealand dollars = 8%Annual interest rate on U.S. dollars = 9%Compute the return from covered interest arbitrage by a U.S. investor with $500,000 to invest.

e. 10.63%

If annualized nominal interest rates in the US and Switzerland are 12% and 8% respectively and the 90-day forward rate for the Swiss franc is $1.0218, at what current spot rate will interest rate parity hold?

. $1.0022

Assume the following information:Spot rate today of Swiss franc = $.601-year forward rate as of today for Swiss franc = $.63Expected spot rate 1 year from now = $.64Rate on 1-year deposits denominated in Swiss francs = 7%Rate on 1-year deposits denominated in U.S. dollars = 9%From the perspective of a U.S. investor with $1,000,000, covered interest arbitrage would yield a rate of return of ________.

b. 12.35%

. Assume the following information. You have $1,000,000 to invest.Current sport rate of pound = $1.6090-day forward rate of pound = $1.573-month deposit rate in U.S. = 3%3-month deposit rate in U.K. = 4%If you use covered interest arbitrage for a 90-day investment, what will be theamount of U.S. dollars you will have after 90 days?

a. $1,020,500.

Assume the following information:Current spot rate of Australian dollar = $.64Forecasted spot rate of Australian dollar 1 year from now = $.591-year forward rate of Australian dollar = $.62Annual interest rate for Australian dollar deposit = 9%Annual interest rate in U.S. = 6%Given the above information, the return from covered interest arbitrage by a U.S.investor with $500,000 to invest is: ________.

e. 5.59%

Given that annual deposit rates for Dollars and Euros are 6% and 4% respectively for the next 5 years. If the current spot rate of the Euro is $1.4015, obtain the implied rate for the Euro five years from now if International Fisher Equation holds exactly.

a. $1.5415

Assume that during a given period the nominal interest rate in Cyprus was 7% while the nominal interest rate in the US was 5%. The spot rate for the Cyprus pound ($/CYP) started at $1.50. At the end of the period, according to the IFE, the Cyprus pound should adjust to a new level of:

a. $1.47

Assume the following information:U.S. deposit rate for 1 year = 11%U.S. borrowing rate for 1 year = 12%Swiss deposit rate for 1 year = 8%Swiss borrowing rate for 1 year = 10%Swiss forward rate for 1 year = $.40Swiss franc spot rate = $.39Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, whatwill be the approximate value of these exports in 1 year in U.S. dollars given thatthe firm executes a forward hedge?

c. $240,000

Assume the following information:U.S. deposit rate for 1 year = 11%U.S. borrowing rate for 1 year = 12%New Zealand deposit rate for 1 year = 8%New Zealand borrowing rate for 1 year = 10%New Zealand dollar forward rate for 1 year = $.40New Zealand dollar spot rate = $.39Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ andexpects to receive NZ$600,000 in 1 year. Using the information provided, whatwill be the approximate value of these exports in 1 year in U.S. dollars given thatthe firm executes a money market hedge?

d. $236,127

Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rateis $2.00, the British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.

. e. None of the above

. A MNC will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:Exercise price = $.61 Premium = $.02 Spot rate = $.60Expected spot rate in 30 days = $.56 30-day forward rate = $.62

590,000

Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:U.S. Switzerland360-day borrowing rate 7% 5% 360-day deposit rate 6% 4%Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Company uses a money market hedge, it will receive ________ in 360 days.

$96,914

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:U.S Switzerland360-day borrowing rate 7% 5% 360-day deposit rate 6% 4%You need to pay a sum of SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

98,769

Your company will receive C$600,000 in 90 days. The 90-day forward rate for Canadian dollar is $.80. If you use a forward hedge, you will receive:

480,000 in 90 days

83. A call option exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.03 per unit. A put option also exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You observe the spot rate of the pound to be $1.57, 90 days later. Determine the amount of dollars to be received, after accounting for the option premium.

c. $1,106,000

Assume that Smith Corporation needs to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, 90-day expiration date, and a premium of $.04. A put option also exists on British pounds, with an exercise price of $1.69, 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). The spot rate of the pound turns out to be $1.76 in 90 days. Determine the dollar cost of the payables, including the cost of the option.

e. $344,000

Assume that IRP holds. The U.S. five-year interest rate is 5% per year while the Mexican five-year rate is 8% per year. If today's spot rate of the peso is $.20, what is the approximate five-year forecast of the peso's spot rate using the five year forward rate?

e. $.174

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.02 per unit and the exercise price of the option is $.94. If the spot rate at the time of maturity is $.99, what is the net amount received by the corporation if it acts rationally?

b. $97,000.

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

d. $36,400

113. Your company expects to pay 5,000,000 Japanese yen 90 days from now. You decide to hedge your position by buying Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 90 days to be $.0090. How many dollars will you need to meet your obligation 90 days from now?

d. $47,500

A speculator sells a put option on Canadian dollars for a premium of $.03 per unit. with an exercise price of $.98. The size of the option contact is C$50,000 and will not be exercised until expiration if at all. If the spot rate for Canadian dollar is $.90 on at expiration, the net profit for the speculator is:

b. -$2500

If the interest rate on a deposit in the U.K. pound is 6% per year, and the pound is expected to depreciate against the U.S. dollar by 2% , what does the interest rate parity theory imply about the interest rate on a deposit in U.S. dollar?

b. 4%

Assume that the bid rate for Australian dollar $.60 while the ask rate is $.61 at Bank A. Also assume that the bid rate for the Australian dollar is $.62 while the ask rate is $.625 at Bank B. What would be your profit if have $100,000 and you execute locational arbitrage ?

d. $1639.30

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.

covered interest arbitrage

Due to ____, market forces should realign the spot rate of a currency among banks.

locational arbitrage

Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar

triangular arbitrage

If interest rate parity exists, then ____ is not feasible.

covered interest arbitrage

In which case will locational arbitrage most likely be feasible?

One bank's bid price for a currency is greater than another bank's ask price for the currency.

When using ____, funds are not tied up for any length of time.

B and C

When using ____, funds are typically tied up for a significant period of time.

covered interest arbitrage

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

should exhibit a discount.

If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:

British investors could possibly benefit from covered interest arbitrage.

If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

U.S. investors could possibly benefit from covered interest arbitrage.

Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?

downward pressure on the euro's forward rate.

Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?

upward pressure on the Swiss franc's forward rate.

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

spot rate of peso increases; forward rate of peso decreases.

Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$15,385.

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

larger will be the forward discount of the foreign currency.

Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound

=

$1.30

90-day forward rate of pound

=

$1.28

3-month deposit rate in U.S.

=

3%

3-month deposit rate in Great Britain

=

4%

$1,024,000.

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered on U.S. dollars

=

12%

1-year deposit rate offered on Singapore dollars

=

10%

1-year forward rate of Singapore dollars

=

$.412

Spot rate of Singapore dollar

=

$.400

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

Assume the following information:

Current spot rate of New Zealand dollar

=

$.41

Forecasted spot rate of New Zealand dollar 1 year from now

=

$.43

One-year forward rate of the New Zealand dollar

=

$.42

Annual interest rate on New Zealand dollars

=

8%

Annual interest rate on U.S. dollars

=

9%

about 10.63

Assume the following bid and ask rates of the pound for two banks as shown below:

Bid

Ask

Bank A

$1.41

$1.42

Bank B

$1.39

$1.40

the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$24,390.

Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

larger will be the forward premium of the foreign currency.

Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

appreciate; depreciate

Assume the following information:

Spot rate today of Swiss franc

=

$.60

1-year forward rate as of today for Swiss franc

=

$.63

Expected spot rate 1 year from now

=

$.64

Rate on 1-year deposits denominated in Swiss francs

=

7%

Rate on 1-year deposits denominated in U.S. dollars

=

9%

12.35

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?

.50.

Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

None of the above

Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:

U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.

Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

premium; decrease

Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$7,067.

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

$1,020,500.

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks

=

12%

1-year deposit rate offered on Swiss francs

=

10%

1-year forward rate of Swiss francs

=

$.62

Spot rate of Swiss franc

=

$.60

Given this information:

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

about 5.59

Bid

Ask

Bank C

$1.61

$1.63

Bank D

$1.58

$1.60

the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$16,393.

Exchange rate of Singapore dollar in U.S. $

=

$.60

Exchange rate of pound in U.S. $

=

$1.50

Exchange rate of pound in Singapore dollars

=

S$2.6

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?

$1,639.

Which of the following is an example of triangular arbitrage initiation?

buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.

You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?

A$39.93.

Quoted Bid Price

Quoted Ask Price

Value of a British pound () in $

$1.61

$1.62

Value of a New Zealand dollar (NZ$) in $

$.55

$.56

Value of a British pound in

New Zealand dollars

NZ$2.95

NZ$2.96

$15.43.

You have $900,000 to invest:

Current spot rate of Australian dollar (A$)

=

$.62

180-day forward rate of the Australian dollar

=

$.64

180-day interest rate in the U.S.

=

3.5%

180-day interest rate in Australia

=

3.0%

$56,903.

You have $400,000 to invest:

Current spot rate of Sudanese dinar (SDD)

=

$.00570

90-day forward rate of the dinar

=

$.00569

90-day interest rate in the U.S.

=

4.0%

90-day interest rate in Sudan

=

4.2%

$416,068.77.

According to interest rate parity (IRP):

the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.

discount; increase

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks

=

10%

1-year deposit rate offered on British pounds

=

13.5%

1-year forward rate of Swiss francs

=

$1.26

Spot rate of Swiss franc

=

$1.30

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

If quoted exchange rates are the same across different locations, then ____ is not feasible.

A and C

Points above the IRP line represent situations where:

covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

Points below the IRP line represent situations where:

covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

all of the above.

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.

premium; 2.73

Exchange rate of Japanese yen in U.S. $

=

$.011

Exchange rate of euro in U.S. $

=

$1.40

Exchange rate of euro in Japanese yen

=

140 yen

10%

Quoted Bid Price

Quoted Ask Price

Value of an Australian dollar (A$) in $

$0.67

$0.69

Value of Mexican peso in $

$.074

$.077

Value of an Australian dollar in

Mexican pesos

8.2

8.5

$2,368

Which of the following is not mentioned in the text as a form of international arbitrage?

Transactional arbitrage

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?

$1,639

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place.

A and C

Hewitt Bank quotes a value for the Japanese yen () of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is 118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?

$5,030.45

Quoted Bid Price

Quoted Ask Price

Value of a British pound () in $

$1.61

$1.62

Value of a New Zealand dollar (NZ$) in $

$0.55

$0.56

Value of a British pound in

New Zealand dollars

NZ$2.95

NZ$2.96

$15.43

Which of the following is not true regarding covered interest arbitrage?

Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.

Which of the following is not true regarding covered interest arbitrage?

All of the above are true.

Which of the following is not true regarding interest rate parity (IRP)?

When covered interest arbitrage is not feasible, interest rate parity must hold.